Ltd and Accounting of provisions

Ltd and Accounting of provisions  

 

Question:

For a specific job we have proceeded to a company registration. A VAT law was created by the legal entity with registration under VATA. Upon completion of the work, the Druveti provides a guarantee for the service of 10 years and during that time it can not be closed and VAT and FIFA declarations must be submitted.
The activity is completed in 2016 and during the warranty period, the Company will not have any income, but there will be salary and insurance costs for the manager who is under the management contract and the accounting service under a contract of assignment. At the end of 2016 The company will pay a tax, taking into account only the costs for this year, but that will not be the real profit. How should bookkeeping be done to get a real result. Maybe I'm mistaken and there is another way to report to an DPA.

 

Answer:

Hello,

Once you have proceeded to a company registration, in particular an OTC, the answer to your question is related to NSS-37 Provisions, Contingent Liabilities and Contingent Assets.

In essence, you are subject to all three conditions for accruing expenses during this year and for provisioning during the liability period

1. As a result of the contract on which you have done the job, your company has an obligation to cover the warranty for the service provided.

2. As a result, the company's liability will "expire" economic benefits in the form of cash (wages, social security contributions and possible costs of repairing work defects)

3. The Company may make a sufficiently reliable estimate of the cost of that obligation.

Considering the above, once you assess all of these costs, you accrue them as such in 2016 (because income related to these costs (predictable as salaries and eventual warranty coverage) was reported in 2016), you will make a tax refund adjustment resulting in an increase with these costs (they were not actually incurred and the tax financial result for 2016 was artificially reduced).
With the deferred tax asset so created, with the reversal of the temporary tax difference from the accrued actual expenses in subsequent years at the expense of accrued provisions, you will be able to reduce the temporary tax differences directly to the financial result.

Assuming that you have calculated the cost of the contract in question at the amount of 200,000 BGN:
1. for accruing provisions

- receivables costs 200 000

- Performance of the contract 200 000 contracted provisions

2. To create a deferred tax asset

Temporary Tax Differences 20 000

- profit and loss 20 000

For example, during the first of the following years, contract costs amount to 15,000

3. To account for the expense on account of provisions accrued in 2016

- receivables expenses 15 000

- cash c / a Cash 15 000

4. For the reversal of the temporary tax difference
Profit & Loss 1 500
- Temporary Tax Differences 1 500

There are shades with a revaluation of the provisions, but with the detailed review of the NSS-37 you will get acquainted with them in more detail.

We hope we have been useful

Greetings.